Dani Rodrik's weblogtag:typepad.com,2003:weblog-12826382017-06-09T11:31:18-05:00Unconventional thoughts on economic development and globalizationTypePadWhat’s Wrong With Our System Of Global Trade And Finance?tag:typepad.com,2003:post-6a00d8341c891753ef01bb09a3f3b2970d2017-06-09T11:31:18-05:002017-06-09T11:31:18-05:00That is what John Judis wanted to talk to me about, and we did. This over at TPM is what came out. By the way, Judis' book on populism is great. It makes an important distinction between right-wing and left-wing...Dani Rodrik

That is what John Judis wanted to talk to me about, and we did. This over at TPM is what came out.

By the way, Judis' book on populism is great. It makes an important distinction between right-wing and left-wing populism, a distinction that I have used as well.

Why Did So Many Cheer Turkey's Democracy While It Was Dying?tag:typepad.com,2003:post-6a00d8341c891753ef01bb0994704e970d2017-04-25T08:18:48-05:002017-04-25T08:18:48-05:00Claire Berlinski’s excellent account of the Western (and domestic) observers who cheered on as Turkey was sliding into authoritarianism reminds me of a point I long wanted to make. There was in Erdogan’s early years some reason to be confused...Dani Rodrik

Claire Berlinski’s excellent account of the Western (and domestic) observers who cheered on as Turkey was sliding into authoritarianism reminds me of a point I long wanted to make.

There was in Erdogan’s early years some reason to be confused as to what was going on. Was he a Muslim democrat who was essentially the Turkish equivalent of a European Christian Democrat? Or was he an authoritarian at heart who would resort to repression as soon as he had sufficient control?

We know the answer now. But at the time there was perhaps what an economist would call an “observational equivalence” between the two scenarios.

In his early years, Erdogan was not sufficiently secure in power. Remember that as late as 2008, his party barely escaped closure thanks to a very narrow constitutional court decision. The first five years or so of his coming to power were years of transition, from the secular elites to the AKP-Gulenist alliance. During the transition, Erdogan naturally sought allies among the liberals and the West. But beyond that, the transition opened up space for political discussion and debate in ways that had long escaped the country. The old guard’s power was weakening while Erdogan had not yet consolidated his power. The former could not put the lid on the new developments, while the latter was not strong enough (yet) to crush all potential opposition.

So at the time it may have been genuinely hard to tell where Turkey was really headed – greater democracy or simply a new set of authoritarian elites.

What also contributed to this was that Erdogan, whose reference point was Islam and Ottoman flowering rather than Turkish nationalism and the Young Turks, did not share the secularists’ taboos on two long-festering issues – the Armenian genocide and the Kurds’ demands for greater autonomy. This allowed much greater freedom to discuss those issues than had been the case under the secularists, adding to the appearance of democratic flowering.

To distinguish between the two scenarios, you’d have to look very carefully beneath the surface. Until 2010, I was among those who gave Erdogan the benefit of the doubt. But then I was not writing on Turkey’s politics and did not feign any expertise in it. When I started to pay more attention as a consequence of the Sledgehammer case in early 2010, the true nature of the Erdogan and his Gulenist allies became alarmingly clear. This was not just a massive power play aimed at current and potential opponents. It represented the wholesale undermining of the rule of law. Erdogan was at worst behind it, at best knowingly complicit in it.

In any case, by 2011 there was absolutely no excuse for the commentators Berlinski mentions (and many others) to be singing the democratic tune. I have yet to see a single one of them provide an apology or an honest account of how/why they got it wrong.

Prudential regulation, capital controls, and second-besttag:typepad.com,2003:post-6a00d8341c891753ef01b7c8efacc8970b2017-04-20T12:24:51-05:002017-04-20T12:24:51-05:00A usual argument against the use of capital controls as a prudential measure is that it is always better to tackle problems at their source rather than trying to deal with symptoms. This is called the principle of economic targeting...Dani Rodrik

A usual argument against the use of capital controls as a prudential measure is that it is always better to tackle problems at their source rather than trying to deal with symptoms. This is called the principle of economic targeting in Economics, one of the discipline’s most powerful teachings. The problem with indirect remedies is that they create problems themselves, “by-product distortions” in Econ-speak. With capital controls, those would be corruption and the discouragement of trade and other flows that are not necessarily a problem.

Hyun Song Shin essentially relies on this principle when he argues against capital controls (in a speech yesterday in Washington, DC):

The lesson is to distinguish underlying causes from outward symptoms. Yes, the 2008 financial crisis was in large part a cross-border phenomenon, but focusing on capital flows confuses the symptoms (capital flows) from the underlying causes (excess leverage and funding risk). If the problem is excessive bank leverage and funding risk, then address these risks directly with traditional microprudential, or regulatory tools.

This argument always reminds me of opponents’ argument about why gun controls are not needed: “it’s not guns that kill people; it’s people.” The implication is that we should target the criminals and not the guns. Of course, if we could perfectly regulate the behavior of future criminals, we would not need controls on the sale of guns directly. But most of us are reasonable enough to realize that we have imperfect control over the behavior of gun owners and so we think direct gun controls make sense.

Similarly, if one could design the perfect prudential regulatory regime, targeting all the relevant distortions at source and adjusting pre-emptively to all future financial innovations, then indeed we would not need direct controls on capital flows. But if we cannot, and we surely cannot, we need to work on as many margins available to us as we can. That is why capital controls belong in the arsenal of sensible policy makers.

One of my favorite aphorisms is “the world is second best, at best” (due to Avinash Dixit). It tells us that first-best logic can be misleading in the real world. Interestingly, Shin himself starts his speech by reminding us of the second-best theorem. But then he goes on to apply a first-best argument to dismiss capital controls.

Trade, redistribution, and social dumpingtag:typepad.com,2003:post-6a00d8341c891753ef01bb09921219970d2017-04-18T16:20:31-05:002017-04-18T16:20:31-05:00I just saw this response from Joel Trachtman to my column "Too Late To Compensate Free Trade's Losers." Trachtman argues that "the fundamental problem of winners and losers will not be solved by these changes." I do not disagree. But...Dani Rodrik

I do not disagree. But the fundamental political problem with trade is not there are winners and losers -- the domestic market generates much greater job churn and dislocation than trade does. It is that it generates unfair redistribution, or at least redistribution that can be legitimately perceived as unfair, when goods cross jurisdictional boundaries.

It’s important to distinguish between two versions of an argument as to why trade may be problematic from a social or political perspective.

Some suggest trade is problematic because it redistributes income. The basis for that claim is true, but trivial. Pretty much everything else that happens in a market economy somehow redistributes income. Technology and market competition are the sources of endless churns in an economy. Moreover, plenty of other things, including skill-biased innovation and minimum-wage laws, have vastly greater effects on income distribution than trade.

So it makes very little sense to set international trade apart and decouple it from other domains or approaches for dealing with inequality in labor markets at large (progressive tax systems, active labor market policies, employment-friendly macro policies, etc.). Imports from Germany may adversely affect domestic companies that are displaced, but there’s no reason to treat the people who lose out any differently from workers who are adversely affected by, say, technological innovation. There is a coherent justification for compensating the losers of free trade for reasons of solidarity and equity, but the justification would apply in the case of innovation. Consequently, the preferred remedies should be the same as well.

That brings us to a different social and political objection to trade — that trade violates norms embodied in our institutional arrangements. The suggestion here is that trade may undercut the social bargains struck within a nation and embedded in its laws and regulations. [In this case] compensating the losers would be beside the point, because what is at stake is the surreptitious modification of the rules of the game — the undermining of domestic social bargains through the back door. Trade is not merely a market relationship, but an intervention into domestic institutions and an instrument for reconfiguring them to the detriment of certain groups. It would be entirely legitimate to respond to such an injury by directly curtailing the trade flows that have the alleged effect. After all, this is no different from keeping out imports that violate, say, domestic health and safety regulations, which most countries already do.

As Pierre Rosanvallon puts it, inequality is felt most acutely when citizens believe that the rules apply differently to different people.” It is not inequality per se that people mind; it is unfairness.

This also relates to a question I get very often. If trade is apparently a small component of the overall impact on labor markets, why focus at all on globalization or devise special remedies for globalization. The answer is that it is not the overall quantitative impact that often matters; it is the normative filter through which those impacts are viewed.

Dismal thoughts about the Turkish referendumtag:typepad.com,2003:post-6a00d8341c891753ef01b8d278e441970c2017-04-17T14:34:20-05:002017-04-17T17:49:36-05:00I don’t write a lot on Turkey these days. (My latest piece was published last September. It was on Erdogan’s missed opportunities to enter history books as a truly great leader, rather than the corrupt tyrant he seems destined for.)...Dani Rodrik

I don’t write a lot on Turkey these days. (My latest piece was published last September. It was on Erdogan’s missed opportunities to enter history books as a truly great leader, rather than the corrupt tyrant he seems destined for.) It’s partly because the subject is too depressing: try hard as I might, I really cannot find a good scenario developing over the years ahead.

It’s also because conventional wisdom has so thoroughly converged on what I have been saying since I first began to write on Turkey’s politics in 2010. For a few years, I was a relatively lonely voice in a Western media landscape full of cheerleading for Erdogan and his then-allies, the Gulenists. (Sorry pundits, I wrote my “Turkey’s Democracy is Dead” piece seven years ago, back in June 2010!) I don't see much to be gained today by repeating what everyone else is saying about the abysmal state of Turkey’s democracy and rule of law.

I do think a lot about Turkey, mostly about whether there was another path. Had the secular elite been more tolerant and opened up the political system earlier, might the religious-conservative backlash been avoided? Or, as many among those former elite argue these days, not without some justification, would the end simply have come sooner?

Had the Gulenists not whipped up Erdogan into a frenzy of paranoia by concocting fictitious coup attempts, might he have eased up? What if the Gulenists had not been so intent on toppling him, once their alliance collapsed? What if the coup attempt, organized by Gulenists in all likelihood, had never taken place? What if Erdogan had not allowed the Gulenists so much power in the bureaucracy, judiciary, and police in the first place?

What if France and Germany had provided a clear path to European membership soon after 2005? What if Kurdish fighters had nor restarted their military campaign against the Turkish state in the summer of 2015? What if there were real leaders within the AKP, not wannabes such as Gul, Davutoglu, or Arinc? What if the main opposition party was run by a charismatic leader who could connect with the masses?

What if, what if.

Erdogan is not a political Islamist or an Islamic ideologue. His own sensibilities and personal cultural orientation are Muslim for sure. But he is first and foremost a political opportunist. That is a good thing, because it means he knows when and how to lower political tension when needed and establish stability.

Had he won the referendum with a comfortable margin, we might have consoled ourselves by thinking that the country would be moving into a calmer period. Erdogan might then have chosen to contest the next election for executive president – which will happen in 2019 latest -- as a unifier. But he lost all the major cities and may have needed some last minute skullduggery for the constitutional change to pass. So I do not see Erdogan easing up on his divisive rhetoric and policies anytime soon.

Asked to predict Turkey’s future by a Turkish newspaper a while back, I said the country would end up looking like Malaysia at best and Afghanistan at worst. A liberal, secular path, with tolerance for diversity, civil liberties, and free speech no longer seems in the cards. That is still pretty much my prognosis.

PS. And here are my rules on post-election punditry, posted on Twitter yesterday:

Ariel Rubinstein on Economics Rulestag:typepad.com,2003:post-6a00d8341c891753ef01bb0983115c970d2017-03-13T11:38:03-05:002017-03-13T11:38:03-05:00The great Ariel Rubinstein has a review of my book Economics Rules in the latest issue of the Journal of Economic Literature. It is a fun review – gratifying for me because Ariel agrees with many of my arguments –...Dani Rodrik

The great Ariel Rubinstein has a review of my book Economics Rules in the latest issue of the Journal of Economic Literature. It is a fun review – gratifying for me because Ariel agrees with many of my arguments – and it has a deeply personal, even emotional, feel to it. Ariel feels strongly about the turn the profession has taken, and agree or not, the essay makes for a very interesting read.

The review took me back to my graduate-student days at Princeton. The place had a very strong crop of theorists among the graduate students, and I used to hang out with them a lot. I am not sure quite why, since what I did was very different from what they did. But they were the most fun bunch in Princeton at the time. I have fun memories of many a drunken night at the Annex – the student bar long since gone.

I remember distinctly our contrasting attitudes to Economics. The theorists had it all together; they knew what they were doing and had few questions about methods or approach. By contrast, I was full of doubt and uncertainty: What was I doing in Economics? Did Economics really help answer any of the big questions? How would we know?

At one of our gatherings, I tried to voice some concerns about economic methodology. One of the theorists impatiently brushed me off. “Why do you bother with methodology,” he asked. “It’s a waste of time. Do your work.” I tried to convince him that these were interesting and important questions. “Maybe so,” he said. “But if any important result comes out of it, someone will tell us and we will know.”

Ariel is evidently a different kind of theorist. He cares about method and doesn’t think we should leave it to just methodologists or philosophers of science. Do read his Economics Fables.

A Foreword to Kari Polanyi Levitttag:typepad.com,2003:post-6a00d8341c891753ef01bb09815bef970d2017-03-08T09:06:17-05:002017-03-08T09:06:17-05:00I was recently asked to write a foreword to the Mexican edition of Kari Polanyi Levitt’s From the Great Transformation to the Great Financialization. Kari is Karl Polanyi's daughter, and the essays in her book -- part memoir, part intellectual...Dani Rodrik

I was recently asked to write a foreword to the Mexican edition of Kari Polanyi Levitt’s From the Great Transformation to the Great Financialization. Kari is Karl Polanyi's daughter, and the essays in her book -- part memoir, part intellectual history, part analysis of the global economy -- provide a wonderful Polanyi-esque perspective on our day. I happily accepted, and my Foreword is below.

****

I first encountered Karl Polanyi as an undergraduate, in a course on comparative politics. “The Great Transformation” was on the course syllabus, sitting somewhat awkwardly amidst more standard political science fare. The assigned reading, on the Speenhamland system and the reform of the Poor Laws in Britain made little impression on me at first. But over the years, I found myself coming back to the central arguments of the book: the embeddedness of a market economy in a broader set of social arrangements, the rejection of an autonomous economic sphere, the folly of treating markets as self-stabilizing.

I am lucky that I had been exposed to Polanyi before I became a full-fledged economist. Looking at standard neoclassical fare from the perspective of the Great Transformation kept me alert to the hidden assumptions of economic theory. Behind those market transactions, expressed with mathematical formalism and in Greek letters, was a host of social, political, legal institutions that enabled those transactions. And these institutions were not unique: they had taken diverse form in different societies and historical periods.

Curiously, the more I became an economist, the more Polanyi’s insights resonated. In my own writings on economic development and globalization, I felt often that I was simply restating the main themes of the Great Transformation for our current era.

I still have on my bookshelf the heavily annotated copy of The Great Transformation from my undergraduate days – along with a newer edition with a foreword from Joe Stiglitz. The old copy has since been enriched by a nice note and signature from Kari Polanyi Levitt which I managed to obtain during a visit to McGill University in February 2001. So it gives me great pleasure to return the favor by writing a few words about Kari Polanyi Levitt’s impressive book, From the Great Transformation to the Great Financialization.

Perhaps no-one has greater claim to the mantle of keeping Karl Polanyi’s thought vibrant and relevant to our current problems than Kari Polanyi Levitt herself. In this beautifully written collection of essays, she not only draws a vivid portrait of her father as a man, a scholar, and an activist, but also provides some extraordinarily prescient analysis of how the world economy got to where it is today. Levitt’s memories of her father are particularly touching. In addition, the essays range widely over economic history, the history of economic thought, the international economic system, and economic development. They are all informed by the same combination of sharp insight and social conscience that made Karl Polanyi’s work stand out. Levitt brings a rich historical texture to the analysis of contemporary problems of the global economy and the challenges of economic development. The spirit of Polanyi lurks always, not too far from the surface.

Levitt aptly uses the term “The Great Financialization” to describe the regime that took over after the Keynesian order inscribed in the Bretton Woods arrangements collapsed. I do not know if Keynes ever read The Great Transformation or was familiar with Karl Polanyi’s thought. But the Bretton Woods arrangements were very much Polanyian in spirit. As Levitt underscores in chap 5, Polanyi was like Keynes in many respects, but unlike Keynes, he questioned the role of economic motives in driving human behavior, which he thought was unique to industrial capitalism.

Keynes sought an international regime that would be hospitable to international trade among nations, but not so intrusive that it would undercut economic management domestically. One key requirement of such a regime was that international finance would be kept in check. Keynes made clear that controls on international capital flows were not meant to be simply a temporary expedient, to be removed once global financial stability was achieved. They were a permanent feature of the system – essential to macroeconomic management at home, and eventually, to the building of mixed economies with adequate social protection.

As Levitt nicely explains, after the 1980s this understanding was superseded by a new one that once again raised the market – and financial markets in particular – above the needs of society. Europe, America, and eventually most middle-income developing nations embraced financial globalization. Free flows of finance across borders, they were led to believe, would allocate savings and investment where they could be used most profitably. Domestic economic management became hostage to the whims of financial markets. Globalization became an end rather than a means.

This wasn’t quite the Gold Standard that Karl Polanyi had held responsible for the political upheavals of the early part of the 20th century. Polanyi thought that the attempt to reimpose the 19th century liberal economic order after World War I produced the world economic crisis and had led to the demise of democracy in Europe. Currencies were now flexible, except for the European nations that would eventually adopt a single currency. Nevertheless, financial globalization entailed donning the Golden Straitjacket, in Thomas Friedman’s evocative phrase.

Many of these essays were written years ago, yet Levitt is prophetic in portraying the hubris and triumphalism of neoliberalism’s advocates and the risks that their experiments took. As she writes, “the attempt to impose on the rest of the world a radical Anglo-American vision of the autonomy of market forces, backed by sanctions to subordinate nations, peoples and communities to the rights of property, is a Utopian project which threatens to unleash uncontrollable reactionary political forces” (p. 52). It is “incompatible with democratic governance, cultural diversity and pluralism” (52).

As I write these words, Donald J. Trump is one month into his presidency. The reactionary backlash that Levitt foresaw, the second part of Polanyi’s double movement, is in full force not only in the United States but in a large number of European nations as well. In Levitt’s words, “market forces of polarization will disembed the economy from traditional social relations and people will seek solidarities of community, ethnicity, religious belief or other solidarities of the excluded” (p. 105). Or as she puts it elsewhere: “democracy is striking back at economics” (p. 60).

We ignore Karl Polanyi at our own peril. And there is no better, richer account of why and how than this wonderful collection of essays.

Thinking straight about fair tradetag:typepad.com,2003:post-6a00d8341c891753ef01b8d2592f6e970c2017-01-27T09:21:41-05:002017-01-27T09:21:41-05:00In the previous entry, I discussed the real-world distributional effects of trade agreements, in the specific case of NAFTA. Why should we care about such redistribution and how should we deal with it? It is useful to distinguish between two...Dani Rodrik

In the previous entry, I discussed the real-world distributional effects of trade agreements, in the specific case of NAFTA. Why should we care about such redistribution and how should we deal with it?

It is useful to distinguish between two different versions of an argument as to why trade may be problematic from a social or political perspective.

Trade is problematic because it redistributes income.

Trade is problematic because it violates norms and understandings embodied in our institutional arrangements – it undercuts domestic social bargains.

The first case is no different than a million other things in a market economy that can have distributional implications. It does not in general require that we target trade specifically.

But the second case is different, and may require trade remedies. I associate the valid core of fair-trade or social-dumping concerns with this particular possibility.

Economists like to claim that the purpose of free trade is to eliminate barriers that impair the efficient global allocation of resources, while helping some of the world’s poorest people. It’s an argument undermined by a simple thought experiment. Suppose we wiped the slate clean of the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, and other similar trade deals, and the world’s trade negotiators banged their heads to figure out the best way of achieving their stated goals. What would they be negotiating about?

What did NAFTA really do?tag:typepad.com,2003:post-6a00d8341c891753ef01b7c8ce6ae2970b2017-01-26T10:45:20-05:002017-01-26T11:06:01-05:00Brad De Long has written a lengthy essay that defends NAFTA (and other trade deals) from the charge that they are responsible for the loss of manufacturing jobs in the U.S. I agree with much that he says – in...Dani Rodrik

Brad De Long has written a lengthy essay that defends NAFTA (and other trade deals) from the charge that they are responsible for the loss of manufacturing jobs in the U.S. I agree with much that he says – in particular with the points that the decline in manufacturing employment has been a long-term process that predates NAFTA and the China shock and that it is driven mainly by the secular trend of labor-saving technological progress. There is no way you can hold NAFTA responsible for employment de-industrialization in the U.S. or expect that a “better” deal with Mexico will bring those jobs back.

At the same time, the essay leaves me frustrated and uneasy. It seems to gloss over the distributional pain of NAFTA and overstate the overall gains.

So what does the evidence say on these issues? We have now some good academic papers that address both overall gains and distributional impacts.

Let’s start with the big picture. Remember first that many advocates of NAFTA made at the outset some wildly optimistic claims about what NAFTA was going to achieve. The most extravagant of the studies, and the one that probably was the most widely circulated, was one produced at the Peterson Institute for International Economics (then just the Institute for International Economics). This study argued that NAFTA would be a net job creator for the U.S., thanks to a projected improvement in the U.S. balance of trade. (This study is apparently no longer available on PIIE’s web site, but excerpts can be found here; see p. 58 for projected impacts.)

This argument was always a red herring: trade agreements are not supposed to create net employment; they simply reshuffle employment. NAFTA neither subtracted, nor added substantial number of jobs to the U.S. economy. At best, it made the U.S. economy more efficient by reallocating workers to jobs that are more productive.

And certainly this happened. But the overall efficiency gains are quite small, much smaller than what the trade volume effects would lead you to believe. A recently published academic study by Lorenzo Caliendo and Fernando Parro uses all the bells-and-whistles of modern trade theory to produce the estimate that these overall gains amount to a “welfare” gain of 0.08% for the U.S. That is, eight-hundredth of 1 percent! See their Table 2 (here or here). Trade volume impacts were much larger: a doubling of U.S. imports from Mexico.

What is equally interesting is that fully half of the miniscule 0.08% gain for US is not an efficiency gain, but actually a benefit due to terms-of-trade improvement. That is, Caliendo and Parro estimate that the world prices of what the U.S. imports fell relative to what it exports. These are not efficiency gains, but income transfers from other countries (here principally Mexico and Canada). These gains came at the expense of other countries.

A gain, no matter how small, is still a gain. What about the distributional impacts?

The most detailed empirical analysis of the labor-market effects of NAFTA is contained in a paper by John McLaren and Shushanik Hakobyan. They find that the aggregate effects were rather small (in line with other work), but that impacts on directly affected communities were quite severe. It is worth quoting John McLaren at length, from an interview:

Q. According to your study, what are the key impacts of NAFTA on U.S. wages?

For the average worker, there is not much of an impact, but for certain important pockets of workers, the lowered import barriers resulting from NAFTA do seem to have lowered wage growth well below what it would have been. This is particularly true for blue-collar workers. We did not see much of an effect on college-educated workers, and executives at the other end of the spectrum did gain some benefit from globalizing their production line.

There is also a big geographic component. Even if you do not work in an affected industry, if you work in a town that depends on one of those industries, your wage growth was likely affected. For example, a waitress working in a town that depends heavily on apparel manufacturing might miss out on wage growth even though she does not work in an industry directly affected by trade. To me, this was one of our most striking findings.

Q. Among impacted workers, how did wages change?

The most affected workers were high school dropouts working in industries that depended heavily on tariff protections in place prior to NAFTA. These workers saw wage growth drop by as much as 17 percentage points relative to wage growth in unaffected industries. If you are a blue-collar worker at the end of the ’90s and your wages are 17 percent lower than they could have been, that could be a disaster for your family. That was the largest impact we saw, and it is important to remember that the impact is much smaller for the average worker.

Q. Which industries have borne the brunt of the impact?

Industries that had a big tariff drop because of NAFTA, and that produce something Mexico tends to export, were hardest-hit in terms of wage growth. According to our data, this included many old-line manufacturing industries, such as those manufacturing apparel, textiles, footwear or structural clay products like brick and tile.

Q. Which geographic areas were most vulnerable?

We found the largest impacts in parts of Georgia, North Carolina, South Carolina and Indiana, with areas like Washington, D.C., Northern Virginia and Maryland among the least vulnerable locales.

In the discussion surrounding NAFTA, you often hear about impacts in manufacturing states like Ohio and Pennsylvania. We did not pick up too much impact there, likely because we were only looking at the effects of reductions in U.S. tariffs against Mexican goods. This study did not look at the effects of reducing Mexican tariffs on products from the U.S., which, paradoxically, could cause problems for U.S. workers as manufacturers move production chains south. That is something that we are researching currently and it could explain what we are seeing in areas like Ohio and Pennsylvania.

In other words, those high school dropouts who worked in industries protected by tariffs prior to NAFTA experienced reductions in wage growth by as much as 17 percentage points relative to wage growth in unaffected industries. I don’t think anyone can argue that a 17 percentage drop is small. As McLaren and Hakobyan emphasize, these losses were then propagated throughout the localities in which these workers lived.

So here is the overall picture that these academic studies paint for the U.S.: NAFTA produced large changes in trade volumes, tiny efficiency gains overall, and some very significant impacts on adversely affected communities.

The consequences of NAFTA for Mexico are another topic which would require a separate post. Let me just say that the great expectations the country’s policy makers had for NAFTA have not been fulfilled. Despite the country’s integration into North American production chains, overall productivity has stagnated. Mexico has been one of Latin America’s underperformers.

So is Trump deluded on NAFTA’s overall impact on manufacturing jobs? Absolutely, yes.

Was he able to capitalize on the very real losses that this and other trade agreements produced in certain parts of the country in a way that Democrats were unable to? Again, yes.

New results on structural change during the recent growth boom in developing countriestag:typepad.com,2003:post-6a00d8341c891753ef01bb097030cb970d2017-01-23T10:59:11-05:002017-01-23T10:59:41-05:00The last two decades have been a rare period of rapid convergence for the world's developing economies. Everyone is familiar with China and India's experience, but growth went beyond these two large economies. Many countries in Sub-Saharan Africa and Latin...Dani Rodrik

The last two decades have been a rare period of rapid convergence for the world's developing economies. Everyone is familiar with China and India's experience, but growth went beyond these two large economies. Many countries in Sub-Saharan Africa and Latin America had their best performance in decades, if not ever.

In a new paper, my co-authors Xinshen Diao (IFPRI) and Margaret McMillan (Tufts and IFPRI) and I examine this experience. We ask what drove this growth and how sustainable is it. Looking at recent growth through the lens of structural change proves particularly insightful.

Here is our decomposition of recent growth accelerations into the within-sector and between-sector terms. The latter term captures the growth contribution of structural change -- the reallocation of labor across sectors with different labor productivities.

What stands out in the analysis is that recent growth accelerations were based on either rapid within-sector labor productivity growth (Latin America) or growth-increasing structural change (Africa), but rarely both at the same time. In Latin America, within-sector labor productivity growth has been impressive, but growth-promoting structural change has been very weak. In fact, structural change has made a negative contribution to overall growth excluding agriculture, meaning labor has moved from high-productivity sectors to low-productivity activities. In Africa, the situation is the mirror image of the Latin American case. Growth-promoting structural change has been significant, especially in Ethiopia, Malawi, Senegal, and Tanzania. But this has been accompanied in these countries by negative labor productivity growth within non-agricultural sectors.

This is not how growth is supposed to happen. As we show in the paper, the East Asian pattern of growth was very different, with both terms contributing strongly to overall growth in high-growth periods. We develop a simple two-sector general equilibrium model in the paper to shed light on these patterns, especially the contrast between the African and Asian models.

We show that the Asian pattern of strong “within” and “between” components is consistent with growth being driven mainly by positive productivity shocks to the modern sectors. The African model, by contrast, is consistent with growth being driven not by the modern sector, but by positive aggregate demand shocks (due to foreign transfers, for example) or by productivity growth in the traditional sector (agriculture). In this version of the model, the modern sector expands and growth-promoting structural change takes place as increased demand spills over to the modern sector. (Our assumptions on preferences ensure that demand shifts are sufficiently biased towards the modern sector to ensure the modern sector expands in both cases, despite relative-price adjustments.) But labor productivity in the modern sector is driven down as a by-product, as diminishing returns to capital set in and less productive firms are drawn in. This is also consistent with the relatively poor performance of manufacturing in Africa.